Oil industry rings in New Year with low crude prices

Oil prices continue to fall as global production shows no sign of abating in the short-term. These pumpjacks are in the Persian Gulf desert oil field of Sakhir, Bahrain. (AP Photo/Hasan Jamali, File)

Photo: Hasan Jamali, STR

Oil producers began 2014 with the stability of resurgent U.S. production and confidence of $100-per-barrel crude. They enter 2015 in a scramble to slash capital spending budgets and keep a lid on other costs when crude sells for half that price.

The U.S. benchmark price of oil for February delivery fell to $53.27 per barrel Wednesday on the New York Mercantile Exchange.

The loss of 85 cents or 1.6 percent on the day capped an annual slide of 46 percent side for the price of crude, the steepest annual drop since the 2008 recession. Global Brent oil for February delivery fell 57 cents or 1 percent Wednesday to $57.33 a barrel on the London ICE Futures exchange, a 48 percent decline for the year.

Natural gas for February delivery closed down 20.5 cents, or about 6.6 percent, at $2.889 per million British thermal unit, down 32 percent through 2014.

"This is a hell of a hickey for the oil business, to be closing the year at less than half the price we saw in May or June," said Tom Kloza, an energy analyst with Oil Price Information Service.

In December, exploration and production companies began rolling out smaller capital budgets for the upcoming year.

ConocoPhillips was one of the first to trim when it announced a capital budget that fell from $16.7 billion in 2014 to an expected $13.5 billion in 2015. Others such as Continental Resources, Rosetta Resources and even giant Exxon Mobil said they would spend less on their capital budgets in 2015 than they did in 2014.

On Wednesday, a small Colorado company became the first U.S. oil producer to publicly announce it would completely suspend its drilling plans for 2015 in the face of falling petroleum prices. Littleton, Colo.-based American Eagle Energy said it sold off hedging contracts that locked in its oil production, saw the borrowing capacity from its credit facility reduced to nothing, and revised its oil production guidance downward. It said it won't resume drilling unless oil prices improve.

American Eagle, worth about $19 million on the stock market Wednesday, said it had $175 million in corporate bonds with 11 percent interest rates.

During the U.S. shale energy surge, Wall Street investors pumped $200 billion over the past few years into the high-yield debt for energy companies, but they've been selling off those bonds at low prices as oil has swung low.

"For the whole industry, if capital markets aren't closed then they're very tight, and anything you do will be very expensive," said Jason Wangler, an analyst at Wunderlich Securities in Houston. "We're probably going to see, if not bankruptcies, then drastic measures. You're seeing more companies doing survival tactics."

The Woodlands-based Excelerate Energy cited low oil prices as playing a role in its decision to pause development of Lavaca Bay LNG, a floating liquefied natural gas export facility planned for 30 miles southeast of Victoria. The company said Wednesday is was reevaluating the economics of the undertaking. Last week, attorneys working for Excelerate asked the Federal Energy Regulatory Commission to put the company's LNG export application into abeyance until April 1 - essentially asking for a pause in the regulatory process as it reexamines the project.

"Recent global economic conditions - including, among other things, a steep decrease in the price of oil - have created uncertainty regarding the economics of the project," the company's lawyer wrote in the filing.

Outside the U.S., the price of natural gas is largely tied to the price of crude oil. When crude's price falls, so too does the price of natural gas, narrowing the spreads that would otherwise benefit U.S.-based LNG exporters.

The slide in oil began over the summer when surging U.S. shale production pushed global supply far enough to outpace stagnant global demand for fuel. The markets tumbled further when the Organization of the Petroleum Exporting Countries chose not to cut production at a Thanksgiving meeting.

On Wednesday, a U.S. Energy Information Administration weekly report said refineries in the U.S. converted more crude into gasoline and other distillates than they ever have before. Still, they were unable to keep pace with crude production - oil inventories rose by 1.8 million barrels at the storage and trading hub in Cushing, Oklahoma.

Drillers had begun to cut back toward the end of the year, but immediate relief appeared unlikely as the U.S. expects to see even more oil flow from shale in 2015.

Depressed crude prices and the resulting cutbacks among producers are expected to dampen the economies of the U.S.'s oil producing states, said Andy Lipow of Lipow Oil Associates LLC, a consulting firm.

"We are going to see a significant slowdown in the growth of North Dakota and Texas," he said. "Even the truck driver who is making $125,000 to $150,000 a year hauling crude is likely to make less money next year."

But if a flagging oil and gas industry will slow Texas' growth, cheap energy is expected to fuel the wider U.S. economy.

In the current 50-percent fall in crude prices, the U.S. could net 1.2 million more jobs as lower energy costs spur consumer spending and hiring, according to a Federal Reserve Bank of Dallas model of how oil prices affect U.S. jobs. But Texas could lose 140,000 jobs, according to the same model.

For some in Houston, the falling prices look familiar.

"It's the classic cycle," said Ron Bitto, a retired Baker Hughes employee who edited a history of the company. "It doesn't stay great forever."